Pricing Seasonal Peril Catastrophe Bonds: A Simplified Approach
Abstract
We show a catastrophe bond’s economically meaningful cash flows are the same as a fully continuous term life insurance policy. As a result we obtain a simple catastrophe bond pricing formula expressed in standard actuarial notation. Catastrophe bonds covering seasonal perils have a periodic event intensity and so their issue price varies with effective date during the year. We quantify this variation. We also show how the current value of a seasonal bond varies during the year and explain how a variable coupon would remove this effect. A simple seasonal model produces a flat term structure. We consider how a non-flat pricing yield curve could arise. In addition to providing the first explicit quantification of the impact of seasonality on price, the paper highlights the synergies between property casualty and life insurance actuarial practice groups and illustrates the benefits of a general actuarial education.